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    PPP Rules Are Changing - How To Avoid New Tripwires As A Small Business Owner

    The government responded quickly to the economic impact COVID-19 was having on small businesses.

    PPP money was released, ahead of clear guidelines around qualification and forgiveness. 

    The recently passed Paycheck Protection Program Flexibility Act of 2020 makes further changes to PPP.

    You need to be aware of these changes to avoid unnecessary audits and penalties.

    What Is PPP?

    COVID-19 has resulted in an unprecedented national economic disaster. Forced closures across the country devastated the small business community.

    To prevent a total collapse of the economy, Congress passed the Coronavirus Aid, Relief and Economic Security (CARES) Act in late March 2020.

    Two rounds of Congressional appropriations have been provided to fund the CARES Act.

    The CARES Act consists of four primary components:

    • Economic Impact Payments to American Households
    • Employee Retention Tax Credit
    • Payments to States, Municipal and Tribal governments
    • Paycheck Protection Program (PPP)

    The goal of PPP is to help small businesses meet their payroll, quickly rehire laid-off employees, and cover critical overhead expenses.

    Program funds can be used to cover salaries and benefits. A designated percentage can be used to pay mortgage or rent, and utilities. 

    Small businesses that meet the SBA definition of a small business, independent contractors, self-employed individuals, and non-profit organizations, are among those eligible to receive funds.

    What's Changed?

    Four changes were made to the PPP program.

    • The original guidelines required that you allocate at least 75% of PPP funds toward payroll expenses to qualify for forgiveness. The new threshold is 60%. This change will help small businesses unable to return to full capacity. Accordingly, you can re-open your business with limited staff and use more of the loan to cover operating expenses
    • Under the new law, you now have 24 weeks to utilize that 60% of the program funds to pay your employees. This extension is particularly helpful if you own a retail store or restaurant where resuming normal business operations will take longer
    • If you are unable to utilize at least 60% of your PPP funds toward payroll, then you have a longer period to pay back the loan. The payback period has been extended from two years to five years. And the interest rate remains the same at 1%
    • The fourth change extends the time allowed to bring back employees. The new deadline is December 31st. The government does make some allowances. If you can prove that former employees are no longer available, you may still qualify for loan forgiveness

    Tripwires To Avoid

    PPP quickly became one of the best small business loans programs available. There was a lot of confusion about who qualifies and how to use funds.

    Still, you must watch out for these tripwires that can cause your small business to become a candidate for investigation and audit.

    • Increasing Your Salary: Rules allow you to include your own salary in your payroll calculation. Maintain your current salary or take only a modest increase. Any appearance of embezzling funds is going to result in felony charges
    • Sloppy Recordkeeping: Three branches of the Federal government are involved in monitoring and auditing loan funds. You need to keep meticulous records of loan spending 
    • Including Independent Contractors: Only employees provided with a W-2 are eligible to be counted as employees. Independent contractors can apply directly for loans to cover expenses
    • Misusing PPP Funds: If you have been forced to close or are otherwise experiencing a significant loss of revenue, your financial woes extend beyond payroll. It can be tempting to utilize funds to cover non-business-related purchases too

    How to Record PPP Transactions

    • Separate Your Loan Funds: Set up a separate account at the bank for your loan. This will make it much easier to track and document your expenditures
    • Accounting System: Your PPP loan has the potential to be completely forgiven, therefore you want to be sure to keep accurate records to prove that you qualify. Utilize accounting programs such as QuickBooks or other accounting applications to help tighten your recordkeeping
    • Payroll: Make sure you use a good payroll system at least during the weeks covered by your program loan. You need to account for every payroll cost including the amount, purpose, and date expended.
    • Document Every Disbursement. Keep copies of receipts, checks, or electronic payments for every disbursement. Payroll expenses can be documented with time cards if relevant, tax withholding statements, health insurance, retirement contributions, and payroll reports from your payroll service company


    While PPP is one of the preeminent small business loans programs designed to help you recover from the impact of COVID-19, the original guidelines were confusing and difficult. 

    The latest changes will help you more easily meet the requirements for loan forgiveness and give you more room for investing in your business.